California lawmakers are moving to repair an unexpected problem in the state’s expanded film and television tax credit program, though the fix appears likely to fall short of what Hollywood had been seeking.

Industry advocates have spent the past several weeks warning that a little noticed provision in a June budget bill could weaken the impact of California’s $750 million annual production incentive, which Gov. Gavin Newsom and legislators expanded last year in an effort to slow runaway production and revive local employment.

At issue is SB 122, a budget measure that limits how much companies can use in business tax credits in a single year. The law caps annual use of many corporate tax credits at $5 million for the next three years, and beginning in 2030 creates a permanent limit of either 70 percent of a taxpayer’s liability or $5 million, whichever is greater.

For major studios, that structure could turn a valuable production incentive into a much slower payout.

A company that earns tens of millions of dollars in California film credits could be forced to redeem those credits over several years, reducing their near term value. That is a significant concern in an industry where production decisions are often made by comparing incentive packages across states and countries.

Paramount, for example, was recently awarded $37.7 million in California credits for projects including the Viola Davis thriller Ascent and a Clueless sequel series. Disney received $45 million for an untitled detective series. Under the current cap, studios receiving credits at that scale may not be able to fully monetize them in the year they expected.

The entertainment industry says that uncertainty undercuts the very purpose of the state’s expansion, which was designed to make California more competitive with Georgia, New York, the United Kingdom, Australia, Vancouver and other production hubs.

Unions and industry groups have pushed lawmakers to exempt film and television credits from the cap entirely. The Entertainment Union Coalition has said that hundreds of thousands of messages have been sent to legislators by members concerned about the measure’s impact on jobs.

A full carveout, however, now appears unlikely.

According to people familiar with the negotiations, lawmakers are nearing a more limited compromise. The deal would exempt tax credits for independent film productions, preserving the transferability and value of those credits. It would also create a mechanism to accelerate refunds for studio projects and extend the expiration date on older nonrefundable credits by five years, reducing the risk that credits already earned will go unused.

The agreement is expected to be announced this week and would need to move quickly. Lawmakers face an Aug. 31 deadline to pass bills before the end of the session.

The compromise reflects the political balancing act in Sacramento. The $5 million cap was adopted as a budget stabilizer, aimed largely at preventing major corporations, especially in the tech sector, from using research and development credits to significantly reduce their state tax liability. Lawmakers have been wary of giving Hollywood a broad exemption that could prompt other industries to demand the same treatment.

Still, for entertainment stakeholders, the cap landed at a particularly sensitive moment.

California’s production economy has been trying to recover after years of disruption from the pandemic, the 2023 labor strikes, media consolidation and a sharp pullback in studio spending. The state’s tax credit expansion was one of Sacramento’s most visible efforts to signal that California intended to compete more aggressively for film and television work.

The industry now argues that the cap sends the opposite message.